United Kingdom

Details

  • Service: Tax
  • Industry: Financial Services, Insurance
  • Type: Business and industry issue
  • Date: 05/03/2012

10 steps in to the new life tax regime 

Commencement of the new life tax regime on 1 January 2013 grows ever closer. Much has been said about the new regime from a tax technical perspective. With consultation coming towards an end and revised Finance Bill 2012 clauses to be issued on 29 March 2012, now is the time for organisations to focus on the practicalities of the new regime and how it will impact their business. 10 things which organisations should be considering now are:
  • The move to a commercial basis of allocation brings both challenges and opportunities. Tax departments need to liaise with actuaries to understand the current approach to asset hypothecation in order to arrive at a robust, manageable basis of allocation and to identify areas of difficulty. For example, which measure of bonuses should be used to allocate profit?
  • Tax departments should calculate the transitional adjustment using the 2011 FSA return to estimate the likely quantum and composition and identify any unusual components (for example capital contributions or inter fund balances) that may need further investigation or discussion with HMRC.
  • The scope of the transitional regime anti-avoidance provision is extremely broad. Tax departments need to be mindful of this when considering routine 2012 tax planning to manage the group profile, for example the release of additional surplus in the life company to utilise losses elsewhere in the group.
  • Tax features in a wide range of systems, from embedded value and financial reporting through to unit pricing. Tax departments should liaise with the wider business to ascertain which systems contain tax assumptions and the detail of those assumptions so material changes can be identified. For instance, the revised measure of shareholders share of BLAGAB dividends may be material to the embedded value model.
  • Substantial changes to capital gains systems may be required to accommodate the move to commercial allocation and the associated changes to the asset boxes and share pools. If you outsource CGT to a third party provider, you should start discussions now with the provider.
  • Tax departments should assess the impact of the changes on tax profile to ascertain whether the profile currently assumed across the wider business, for example in embedded value modeling or in unit pricing assumptions, remains valid. Tax profile may be affected, for example by a reduction in excess expenses as a consequence of the separation of BLAGAB and non-BLAGAB and change in treatment of protection business.
  • Pricing assumptions for protection business should be revisited given the loss of cross-synergy between protection and investment business under the new regime.
  • Understand whether capital contributions are likely to be required, particularly on transition to Solvency II. The loss of the shareholder fund, as well as raising operational issues around tracking of grandfathered assets, also re-introduces uncertainty around the possible taxation of such contributions.
  • Impact on shareholder effective tax rate, including the revised calculation of shareholders share of BLAGAB dividends. This share is likely to be smaller (increasing the effective tax rate) but less volatile due to the change from an accounts to a tax measure of income and the removal of expenses from the denominator.
  • Tax departments need to liaise with HMRC in respect of commercial basis of allocation and unusual transition issues.

 

What is apparent from the above is the extent to which tax is embedded within a life business (from pricing to systems to reporting) and the wide and diverse impact of the new life tax regime and the variety of stakeholders. Tax departments should act now! 

 

 

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Carol Newham

Carol Newham

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